Following an emergency meeting with representatives from Qatar's sovereign wealth fund late Wednesday, sources at Swiss commodities giant Glencore International (LON:GLEN) told the Financial Times that they are willing to kill its $68 billion merger with Xstrata.
The deal was pushed to the verge of collapse last night after Qatar which owns closed to 11% of Xstrata unexpectedly opposed the deal's terms.
London-listed Glencore already owns 34% of Xstrata and is offering 2.8 shares for every one of Xstrata, but Qatar is reportedly insisting on a ration of 3.25:1, echoing calls of other major shareholder of the miner who have long insisted on a sweetened bid. FT reports:
However, the commodities trader believes that such a ratio overvalues Xstrata and is prepared to walk away from a deal that chief executive Ivan Glasenberg has long coveted. It believes it would be able to return with a fresh bid later, according to people familiar with both sides. The rules of the UK Takeover Panel would probably prevent a bid within a year should the current proposed deal collapse.
In an effort to appease shareholders earlier today Xstrata (LON:XTA) announced its planned executive retention payouts would be paid entirely in shares, rather than in cash as previously announced "further aligning management's interests with shareholders."
On top of that, the more than generous $342 million (£217 million) in bonuses for senior management – including the $44 million for CEO Mick Davis – would depend on the level of cost savings achieved:
"The previously announced EBITDA synergy estimate of at least US$500 million per annum includes approximately US$50 million of cost synergies. Vesting of retention awards for Xstrata's Management will now only occur if additional cost savings are achieved over and above the US$50 million cost savings already identified in the synergy estimate," the company said in a statement.
The changes come a week after The Association of British Insurers, which represents around a fifth of investments on the London Stock Exchange, issued a so-called “red-top alert” over the payouts indicating a breach in corporate governance.
Reuters reports while both Davis and Glencore CEO Ivan Glasenberg would suffer blows to their reputations as dealmakers if the merger should collapse other parties stand to lose more.
Xstrata shares – held up by the deal while other miners have been sold off – could drop between 20% – 30% handing those Xstrata shareholders currently opposing the deal nothing but a Pyrrhic victory:
It could also prove damaging for Qatar, which has invested more than $4 billion in Xstrata.
Richard Marwood, a portfolio manager at AXA Investment Managers, a top 40 Xstrata investor, said the external pressure from Qatar would give Glencore an opportunity to revise the terms "without too much loss of face".
A collapse of the deal would also be a blow to a long list of bankers involved in the deal, including Citigroup, Morgan Stanley, JP Morgan and Deutsche Bank.
The two companies are spending a combined $200 million on advisers and legal counsel to push the deal through.
Apart from shareholders blocking a deal the European Union is stepping up scrutiny of the mooted merger after steelmakers and other European players "raised fears that the deal could create too powerful a player" in the market for zinc, nickel and coal.
Xstrata said it expects formal notification of the transaction from the European Commission to take place in mid to late August. The July 12 meeting to vote on the deal has also been pushed back to October.
With revenues in excess of $100 billion Glenstrata, as it has been dubbed, would become the 4th largest miner on the planet with Xstrata's current management responsible for over 80% of the combined group's earnings, 150 mining and metallurgical assets and 20 major growth projects.